The Financials Of Payday Loans (And Why They Might Not Be As Bad As You Think)

ZOMG! Have you SEEN the interest rates payday loan companies charge? They’re worse than deep fried Oreos. Can you believe that there are companies that actually engage in this business? If I was in charge, I’d shut all of them down and kick the CEO in the nuts while I was at it! How can they sleep at night?!?!? GOD! This just makes me sick to my stomach. If only these people read my blog, they’d know better.

Sorry about that, guys. I let these gals take over my blog for a little while. That got a little self-righteous there for a sec.

Since the beginning of personal finance blogs, we’ve complained about payday loans. Because I am a contrarian, I penned a piece defending the industry, If you’re borrowing money to buy beer and smokes, you should pay an inflated interest rate. There is zero collateral covering the loan, and they’re generally made to people who have no alternative. If these people were a good credit risk, they’d be able to get a loan at a bank. They are not a good credit risk, therefore should pay inflated rates. Rational people get this, personal finance bloggers do not.

As I’ve said before, if you’re aware of a situation where a customer is getting gouged, you shouldn’t be outraged. You should view it as an opportunity. If you invest in this company, you should enjoy outrageous profits, right? If customers are being overcharged, investors should be thrilled. We already took a look at The Cash Store, Canada’s largest payday loan company, (which I didn’t like) so let’s take a look at some of the American ones.

How about we start with Cash America, the largest? During 2012, the company booked a little over $1.8B in revenue, mostly because the CEO made a deal with Satan. After the company paid all their expenses, they booked $107M in profits. This puts their net profit margin at 5.94%.

Up next is another big one, First Cash Financial Solutions. They dabble in the pawn business as well as the EVIL PAYDAY LOANS. They have over 850 different locations, most of which regularly torture children in the basement. They booked an $80M net profit on $596M of revenue. That’s a net profit of 13.4%.

How about another one, DFC Global Corp., a very innocent sounding name for such an evil company. They operate financial death stores in eight different countries, including Canada, America, and the worst country on the planet, Ireland. The company booked $52M in profit on $1.06B in revenue, for a 4.91% net profit margin.

And finally, let’s look at QC Holdings, a payday loan company which also dabbles in car loans. They made $7.9M on $143M in revenue, for a 5.52% net profit margin.

We’ve looked at the four largest publicly traded payday loan companies in the U.S. If you average out their profit margins, they make 7.44%, an average which is nicely buoyed by First Cash, which is clearly doing something right. I guarantee that number is much smaller than what most of you thought it was.

Let’s compare that to some other companies. During 2012, Apple made a net profit of $41.7B on revenue of $156.5B. That’s a net profit margin of 26.65%. That’s twice as profitable as First Cash, the darling of the payday loan lenders. Why aren’t we talking about Apple’s outrageous prices? Look at all the money they’re making.

How about another company everyone loves, Google? Chances are they control your email, some online documents, your internet searching, and perhaps your first born child. But that’s okay, because apparently their motto is “don’t be evil.” They booked a net profit of $10.8B on $50.2B. Let me do the math for you, it’s a net profit of 21.5%. Google is doing no evil, but still has much higher margins than the evil payday lenders.

I can keep this up all day. Pfizer, (20.5% net margins) Coca-Cola, (18.9%) Lululemon, (19.8%) IBM, (15.9%) Shaw Communications, (15.2%) Disney, (13.5%) Goldman Sachs, (17.9%) Proctor and Gamble, (13.5%) Microsoft, (28.1%[!]) Intel, (20.6%) and Canadian National Railway (29.9%[!!]) all made more per dollar than even the most profitable payday loan company. Where’s the outrage? Why don’t you all harass Canadian National about their clearly outrageous business practices? Why aren’t you calling on Lululemon to charge less for their ridiculously awesome pants?

Maybe, and this might shock you, the people payday loan lenders give money to aren’t very likely to pay it back.

Yes, some of that is because of the very high interest rates. But how good of a credit risk is someone who needs money to make it until their next paycheque? They’re showing that they’re a terrible credit risk by even getting a payday loan in the first place. Payday loan companies write off a whole bunch of loans every year. Because of that, it turns out that they don’t really make that much money.

Are there problems with payday loans? Of course there are. Are they the outrageously expensive money makers you think they are? Hardly. Maybe the rates are so high because they need to be for the lenders to make money. And now that we’ve figured out that ridiculous profits aren’t being made, can we cut the over the top outrage?

10 Comments

It’s quite refreshing to see a (more or less) positive perspective on payday loans. I just want to mention that being a poor credit risk is not the only reason to get a payday loan. Often the time is a factor as well, as you can’t typically get a loan in 30 minutes from a bank, and not everyone has a credit card for a cash advance for reasons entirely unrelated to their credit rating.

If someone want’s to use a payday lender it’s their (poor) choice or most likely their last resort. But most people who choose to take a payday loan have obvoius money/credit issues. Look where the payday outlets are mostly concentrated. It’s not in the middle class “suburbatory” areas.

Where they get a bad name is in their collection practices. I have had some employee’s that had credit problems that used payday loans and ducked their payments. One actually moved, the reminder notices went to the wrong address and suddenly $500.00 became $2,500.00 (not to mention the tears and crying I heard… from a tough looking guy). I also had the misfortune of taking a forwarded call from a collector who thought I was the person who owed the money. I learned a whole new set of swear words that afternoon.

I’m a little cynical as you are. One – don’t take small short term loans at 20% interest, it’s just plain stupid. LOC anyone? For those lending the money expect a high percentage of people taking your loans to default. Obviously the business model works because those places are popping up all over. As long as there is supply and demand for these type loans neither party should complain about them.

There were some gross assumptions made by the author, many that make generalizations about the people who use payday loans. First, it is unfair to compare an Apple or Google to any payday loan company. Not only because they aren’t in the same industry or, because they make more money; but because they do not prey on a certain demographic of people. Payday loans are exclusively in low income neighborhoods and capitalize on the ignorance of those in that community. Apple and Google do not.

Second, to assume that all who frequent a payday loan location are inherently more risky is a bias. It does not take into account that many cash their checks (with outrageous fees) because they don’t know any better. According to the FDIC 10 million Americans are unbanked, this is due to financial miseducation; and cultural distrust in institutions particularly among African American and Latino/a communities.

Those who use the services of payday loans should make better decisions, no arguments there. But to justify the morality of their existence and compare it to companies who do not prey on the ignorance of others, errs on the side of a singular privileged view. One out of touch with the realities of systemic and psychological poverty.

Apple for example has created these devices and people have become addicted to them like crack zombies. You don’t have to have a phone but somehow we all have to have a phone? People have been killed for Iphones that they tried to defend from being stolen from them. Foxconn where they are made has been called a borderline slavery camp (just Google the images using the word foxconn) where there are a high number of suicides from stress levels of the employees making these devices for our enjoyment. The employees don’t have to work there but maybe that’s the only job they can get. There is a subtle similarity here, is there not? You don’t have to get money from a bank or a payday loan place, but you have to eat.

The numbers show that these loans ARE more risky. There are far more defaults on payday loans. No one is targeting any group in this discussion – the groups target themselves. Take a look at a service like “Prosper” on line micro loans. Look how the loans are graded there. There are graded by Risk. Same deal. The higher the risk the higher the payout to the person making the loan and higher default levels. Prosper has no walls or populate any community being on-line. Yes we could talk about the cycle of poverty. The reasons are much broader then just payday loans.

A lot of big companies are ruthless if you put them under a microscope. This being an investment blog, it makes us money when our stock picks go up. Look at “Vice” companies like Altria, Las vegas sands, General Dynamics. These are huge companies raking in billions from smokers, gamblers and machines that are sent to blow people up. I think the author is saying Payday loan people are bad but hey… some big companies are worse. It’s like eating a steak. If it’s on a plate it’s fantastic. But… if i had to pull the trigger, skin it, process it I would probably faint and throw up and not eat a steak for a long time. Somehow if it’s on that plate all dressed up it makes it ok.

By no means is every company perfect, and Apple by no means should be the model. I agree with you there. My only objection is that payday loan companies allow the cycle of poverty to continue. And to say that “they target themselves” points to the same bias that I mentioned earlier. The people that use these services do not ask to be enslaved by check cashing boutiques, car title loans or payday loans. Prosper, like Lending Club is in a completely different demographic that most people who are in the payday loan category do not have access to. Prosper does not withhold massive portions of your check, hold your car tile and it requires business plans in some cases and proposals to evaluate risk. Many (not all) consumers from Prosper and the Lending Club are attempting to pay off student loan debt or pay off credit cards. Two more venues that the the aforementioned population is less likely to have access too.

I do understand that a higher risk should garner a higher return, that’s basic finance. But I believe there is something morally wrong about preying on an already financially disadvantaged population. Regardless if you can manipulate and compare profit margins to make it seem less malicious.

It comes down to this: Who primary uses the services of payday loans? Do they have the same access to an education that will move them economically? And is there disproportionate number of loan companies that exist in that area?

I think we all know the answers to those questions, and that’s why its wrong.

> It comes down to this: Who primary uses the services of payday loans? Do they have the same access to an education that will move them economically? And is there disproportionate number of loan companies that exist in that area?

It is typical to state, without justification, that payday borrowers are uneducated, but the numbers don’t bear it out.

> “Families whose major income recipient had a university degree less frequently reported using payday loans—only 1.3% compared with over 3% for those with high school graduation or a postsecondary certificate or diploma. This may be related to higher income or being more informed about credit options, their costs, and the consequences of carrying excessive debt (Stegman and Faris 2003, 16). However, after other family characteristics were controlled for, education was not related to the use of payday loans.”

it’s also not very apparent that only the extremely poor and desperate are payday loan users, but despite income being a factor, high earners are still frequent borrowers:

> One might expect income to be related to payday-loan borrowing. Indeed, low-income families6 (after tax) were fully twice as likely as those not in low income to have used payday loans—4.6% compared with 2.3% (data not shown). A further breakdown shows that families with higher incomes had significantly lower incidence of using payday loans—1.4% for those above $66,000 versus 3.0% for those between $40,001 and $66,000.

I am speaking from a U.S. perspective. The statistics you brought up were from a Canadian source. I am not familiar enough with the economy and social construct to effectively state my point from that perspective. Yet, for the United States the stats are as follows…

Statistics from the Center for American Progress:
“Families who borrowed from a payday lender in the past year were more likely to be minorities and single
women than their counterparts. They also tended to be younger and had less educational attainment.”

“The largest share of payday loan borrowers (39 percent) had a high school diploma or equivalent General Educational Development, or GED certificate, but no college degree. Individuals with some college education but no degree comprise the next largest share, totaling 27 percent of families who had borrowed a payday loan. In contrast, a much smaller share of heads of families who had taken out a payday loan had a college degree (19 percent) than heads of families who had not taken out a payday loan (36 percent).”

“Additionally, a 2006 Department of Defense report reviewed predatory lending practices directed at members of the military and their families, including payday, car title, tax refund anticipation, and installment loans.”

Apparently I can’t reply more than 5 levels deep in this commenting system, but take a closer look at the numbers you’re quoting and you’ll see that they more or less track the distribution of education in the population. 46% of payday borrowers had some college education or higher, compared to 57% of the population. 54% of borrowers had high school or less, compared to 43% of the population. Certainly there is some bias, but not so much that I think it’s fair to say that payday lenders are “preying on an already financially disadvantaged population”. People of all walks of life use payday loans.

Question: should low income people have zero access to credit instead of access to high-interest credit?

The fact is it takes high interest rates to make payday loans economic for a business owner. So, really, if you’re not supportive of payday loans, you’re not supportive of the idea that poor people should have access to credit.